A short story of the Phillips curve: from Phillips to Friedman… and back?

2018 ◽  
Vol 6 (4) ◽  
pp. 493-516 ◽  
Author(s):  
Antonella Stirati ◽  
Walter Paternesi Meloni
Keyword(s):  
Short Story ◽  
Path Dependence ◽  
Phillips Curve ◽  
Presidential Address ◽  
Alternative Theory ◽  
Natural Rate ◽  
Macroeconomic Theory ◽  
Long Run ◽  
Change Of Perspective ◽  
Original Approach

A major contribution of Friedman's 1968 presidential address was the introduction of the long-run vertical Phillips curve. That view, which is consistent with neoclassical foundations, has become so profoundly entrenched in macroeconomists' thinking that increasing evidence of ‘hysteresis’ has not as yet dislodged it. The prevailing notion of the non-accelerating inflation rate of unemployment (NAIRU) is constructed in terms of the ‘natural’ unemployment rate, which has allowed for some changes regarding its microeconomic determinants. However, the macroeconomic features of Friedman's natural rate and the NAIRU remain very much the same and unchanged. The blatant path-dependence of empirically estimated NAIRUs creates a dissociation between macroeconomic theory and empirics which, in our view, is unacceptable and demands a change of perspective. Adopting an alternative theory of distribution and employment might rehabilitate the original approach taken by Phillips vis-à-vis Friedman's legacy.

scholarly journals Recovering Keynesian Phillips curve theory: hysteresis of ideas and the natural rate of unemployment

2018 ◽  
Vol 6 (4) ◽  
pp. 473-492 ◽  
Author(s):  
Thomas Palley
Keyword(s):  
Economic Theory ◽  
Phillips Curve ◽  
50Th Anniversary ◽  
Theoretical Argument ◽  
Natural Rate ◽  
Macroeconomic Theory ◽  
Natural Rate Of Unemployment ◽  
Economics Profession ◽  
Curve Theory

Economic theory is prone to hysteresis. Once an idea is adopted, it is difficult to change. In the 1970s, the economics profession abandoned the Keynesian Phillips curve and adopted Milton Friedman's natural rate of unemployment (NRU) hypothesis. The shift was facilitated by a series of lucky breaks. Despite much evidence against the NRU, and much evidence and theoretical argument supportive of the Keynesian Phillips curve, the NRU hypothesis remains ascendant. The hypothesis has had an enormous impact on macroeconomic theory and policy. 2018 is the 50th anniversary of Friedman's introduction of the NRU hypothesis. The anniversary offers an opportunity to challenge rather than celebrate it.

scholarly journals The wrong track also leads someplace: Milton Friedman's presidential address at 50

2018 ◽  
Vol 6 (4) ◽  
pp. 517-532 ◽  
Author(s):  
Servaas Storm
Keyword(s):  
Phillips Curve ◽  
Presidential Address ◽  
Aggregate Demand ◽  
Financial Fragility ◽  
American Economic Association ◽  
Structural Forces ◽  
Long Run ◽  
Economic Association ◽  
The Right ◽  
Do So

Milton Friedman's presidential address to the American Economic Association holds a mythical status as the harbinger of the supply-side counter-revolution in macroeconomics – centred on the rejection of the long-run Phillips-curve inflation–unemployment trade-off. Friedman (seconded by Edmund Phelps) argued that the long run is determined by ‘structural’ forces, not demand, and his view swept the profession and dominated academic economics and macro policymaking for four decades. Friedman, tragically, put macroeconomics on the wrong track which led to disaster: secular stagnation, rising inequality, mounting indebtedness, financial fragility, a banking catastrophe and recession – and no free lunches. This is Friedman's legacy. We have to unlearn the wrong lessons and return macroeconomics to the right track. To do so, this paper shows that Friedman's (and Phelps's) conclusions break down in a general model of the long run in which productivity growth is endogenous – aggregate demand is driving everything again, short and long.

scholarly journals Offre globale en économie ouverte, courbe de Phillips et détermination du taux de chômage naturel : une reformulation théorique

2009 ◽  
Vol 55 (3) ◽  
pp. 375-396 ◽  
Author(s):  
Louis Phaneuf
Keyword(s):  
Phillips Curve ◽  
Structural Model ◽  
Reduced Form ◽  
Supply Side ◽  
Special Importance ◽  
Natural Rate ◽  
Explanatory Variables ◽  
Natural Rate Of Unemployment ◽  
Long Run

Criticizing the fact the Phillips curve wage and price equations are usually reduced form or quasi-reduced form equations without an explicit structural model behind, this article is an attempt to provide a supply side based structural model of the Phillips curve. Of special importance are the theoretical specifications of the resulting wage and price equations that include several new explanatory variables and especially policy variables. After having demonstrated under what structural conditions the price-Phillips curve of this model will be a vertical in the long run, the model is solved for the theoretical specification of the natural rate of unemployment.

scholarly journals The Brazilian Connection in Milton Friedman’s 1967 Presidential Address and 1976 Nobel Lecture

2020 ◽  
Vol 52 (2) ◽  
pp. 367-396
Author(s):  
Mauro Boianovsky
Keyword(s):  
Phillips Curve ◽  
Presidential Address ◽  
Institutional Arrangements ◽  
Industrialized Countries ◽  
Natural Rate ◽  
Nobel Lecture ◽  
The Face ◽  
Absence Of Evidence ◽  
Growing Economy ◽  
Significant Support

This article investigates the role played by Friedman’s interpretation of Brazilian inflation in his 1967 formulation of the natural rate hypothesis and in his 1976 discussion of indexation and other institutional arrangements in the face of chronic inflation. It is argued that, as an empirical economist and in the absence of evidence from industrialized countries, Friedman found in the Brazilian 1964–66 stabilization episode significant support for his argument about inflation acceleration and a shifting Phillips curve. Friedman’s interest in the Brazilian inflationary and growing economy prompted him to visit the country in 1973. The context and implications of Friedman’s Brazilian travel are also tackled in the paper.

scholarly journals Market Power, NAIRU, and the Phillips Curve

2020 ◽  
Vol 2020 ◽  
pp. 1-18
Author(s):  
Derek Zweig
Keyword(s):  
Interest Rates ◽  
Phillips Curve ◽  
Functional Form ◽  
The United States ◽  
Medium Term ◽  
Natural Rate ◽  
Natural Rate Of Unemployment ◽  
Long Run ◽  
Weak Evidence ◽  
Short Run

We explore the relationship between unemployment and inflation in the United States (1949-2019) through both Bayesian and spectral lenses. We employ Bayesian vector autoregression (“BVAR”) to expose empirical interrelationships between unemployment, inflation, and interest rates. Generally, we do find short-run behavior consistent with the Phillips curve, though it tends to break down over the longer term. Emphasis is also placed on Phelps’ and Friedman’s NAIRU theory using both a simplistic functional form and BVAR. We find weak evidence supporting the NAIRU theory from the simplistic model, but stronger evidence using BVAR. A wavelet analysis reveals that the short-run NAIRU theory and Phillips curve relationships may be time-dependent, while the long-run relationships are essentially vertical, suggesting instead that each relationship is primarily observed over the medium-term (2-10 years), though the economically significant medium-term region has narrowed in recent decades to roughly 4-7 years. We pay homage to Phillips’ original work, using his functional form to compare potential differences in labor bargaining power attributable to labor scarcity, partitioned by skill level (as defined by educational attainment). We find evidence that the wage Phillips curve is more stable for individuals with higher skill and that higher skilled labor may enjoy a lower natural rate of unemployment.

scholarly journals Short-Run and Long-Run Effects of Milton Friedman's Presidential Address

2018 ◽  
Vol 32 (1) ◽  
pp. 121-134 ◽  
Author(s):  
Robert E. Hall ◽  
Thomas J. Sargent
Keyword(s):  
Monetary Policy ◽  
Phillips Curve ◽  
Presidential Address ◽  
Real Economy ◽  
The Real ◽  
Long Run ◽  
Invariance Hypothesis ◽  
Short Run ◽  
The Right ◽  
Main Message

The centerpiece of Milton Friedman's (1968) presidential address to the American Economic Association, delivered in Washington, DC, on December 29, 1967, was the striking proposition that monetary policy has no longer-run effects on the real economy. Friedman focused on two real measures, the unemployment rate and the real interest rate, but the message was broader—in the longer run, monetary policy controls only the price level. We call this the monetary-policy invariance hypothesis. By 1968, macroeconomics had adopted the basic Phillips curve as the favored model of correlations between inflation and unemployment, and Friedman used the Phillips curve in the exposition of the invariance hypothesis. Friedman's presidential address was commonly interpreted as a recommendation to add a previously omitted variable, the rate of inflation anticipated by the public, to the right-hand side of what then became an augmented Phillips curve. We believe that Friedman's main message, the invariance hypothesis about long-term outcomes, has prevailed over the last half-century based on the broad sweep of evidence from many economies over many years. Subsequent research has not been kind to the Phillips curve, but we will argue that Friedman's exposition of the invariance hypothesis in terms of a 1960s-style Phillips curve is incidental to his main message.

Comparative Properties of Models of the UK Economy

1990 ◽  
Vol 133 ◽  
pp. 91-115 ◽  
Author(s):  
P.G. Fisher ◽  
D.S. Turner ◽  
K.F. Wallis ◽  
J.D. Whitley
Keyword(s):  
Phillips Curve ◽  
Demand Management ◽  
Nominal Wage ◽  
Natural Rate ◽  
Price Inflation ◽  
Trade Off ◽  
Natural Rate Of Unemployment ◽  
Long Run ◽  
Recent Developments ◽  
The Uk

The nature of the association between inflation and the level of unemployment has been a persistent issue of controversy over the last three decades. Initially, attention focussed on the statistical relationship between nominal wage inflation and unemployment— the Phillips curve—which could be seen equally as a relationship between price inflation and unemployment, if prices are a constant mark-up on wages. This was quickly adopted as a menu for policy choice, describing the trade-off between increases in unemployment and reductions in inflation. By the 1970s, however, the question was whether a long-run trade-off existed at all, the OECD economies having experienced rising unemployment and, simultaneously, rising inflation. The subsequent re-examination of labour market behaviour introduced the concept of an equilibrium rate (the natural rate) of unemployment which, in the monetarist view, was not amenable to demand management policies. More recent developments reflect a growing concern with the supply side of the economy, including the question of what determines the non accelerating inflation rate of unemployment (NAIRU).

scholarly journals Friedman and Phelps on the Phillips curve viewed from a half century's perspective

2018 ◽  
Vol 6 (4) ◽  
pp. 425-436 ◽  
Author(s):  
Robert J. Gordon
Keyword(s):  
Phillips Curve ◽  
Demand Curve ◽  
Wage Setting ◽  
Natural Rate ◽  
Underlying Assumption ◽  
The Past ◽  
Real Gdp ◽  
Long Run ◽  
Short Run ◽  
The 1960S

In the late 1960s the stable negatively sloped Phillips curve was overturned by the Friedman–Phelps natural rate model. Their Phillips curve was vertical in the long run at the natural unemployment rate, and their short-run curve shifted up whenever unemployment was pushed below the natural rate. This paper criticizes the underlying assumption of the Friedman–Phelps approach that the labor market continuously clears and that changes in unemployment down or up occur only in response to ‘fooling’ of workers, firms, or both. A preferable and resolutely Keynesian approach explains quantity rationing by inertia in price and wage setting. The positive correlation of inflation and unemployment in the 1970s and again in the 1990s is explained by joining the negatively sloped Phillips curve with a positively sloped dynamic demand curve. For any given growth of nominal GDP, higher inflation implies slower real GDP growth and higher unemployment. This ‘triangle’ model based on demand, supply, and inertia worked well to explain why inflation and unemployment were both positively and negatively correlated between the 1960s and 1990s, but in the past decade the slope of the short-run Phillips curve has flattened as inflation exhibited a muted response to high unemployment in 2009–2013 and low unemployment in 2016–2018.

scholarly journals The time-varying long-run rate of unemployment in Colombia

2019 ◽  
Vol 68 (269) ◽  
Author(s):  
Luis E. Arango ◽  
Carlos E. Posada
Keyword(s):  
Phillips Curve ◽  
Structural Characteristics ◽  
Commodity Markets ◽  
Time Varying ◽  
Classical Approach ◽  
Equilibrium Equations ◽  
Natural Rate ◽  
Natural Rate Of Unemployment ◽  
Long Run ◽  
The Cost

After the failure of the Phillips curve to explain the simultaneous ocurrence of rising inflation  and unemployment, the classical approach to the  theory of unemployment and inflation reemerged (see Friedman 1968; Phelps 1967, 1968). Milton Friedman (1968) defined the natural rate of unemployment as the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demand and supplies, the cost of gathering information about job vacancies and labor avialabilities, the cost of mobility, and so on.

scholarly journals The relationship between inflation and unemployment: a critique of Friedman and Phelps

2018 ◽  
Vol 6 (4) ◽  
pp. 533-544 ◽  
Author(s):  
Louis-Philippe Rochon ◽  
Sergio Rossi
Keyword(s):  
Phillips Curve ◽  
Presidential Address ◽  
50Th Anniversary ◽  
Banking System ◽  
World Population ◽  
Negative Consequences ◽  
Natural Rate ◽  
Interest Rate Policy ◽  
Natural Rate Of Unemployment ◽  
The One

The ‘natural rate of unemployment’ was not an important part of Friedman's presidential address, although it is what the paper is remembered for. On the 50th anniversary of the paper, we argue that there is no ‘natural rate of unemployment’, and that the relation between inflation and unemployment is not the one assumed by Friedman or neoclassical theory. In Section 2 we present the conventional framework in which the Phillips curve is drawn by neoclassical economists. It emphasizes the exogenous nature of money, as well as the assumption that (a large part of) unemployment has to do with workers’ trade-off between paid work and leisure time (in a utility maximization perspective). Section 3 explains that the neoclassical framework is flawed, because money is endogenous and unemployment is not simply an outcome of workers’ choices with regard to the observed ‘equilibrium’ wage level. This section points out that inflation cannot be controlled with an interest-rate policy and that unemployment is the result of a lack of effective demand (hence it is involuntary). Section 4 provides two alternative macroeconomic analyses, one where inflation as well as unemployment are explained by the disorderly working of the banking system and another where conflict in the functional distribution of income within a monetary economy of production dominates. The conclusion offers some policy-oriented remarks as regards contemporary fiscal and monetary policies that a variety of countries have been adopting in their (largely ineffective) attempt to emerge from the crisis that erupted in 2008 at the global level – whose negative consequences still affect a relevant part of the world population.

Sign in / Sign up

Export Citation Format

Share Document